Tax inspectors clash with MPs over expenses

Expenses watchdog defends members against Revenue's charge that accountancy fees are not tax deductible

HMRC has repeatedly told the Independent Parliamentary Standards Authority that other employees are not allowed to claim back professional fees and MPs should not have special dispensation. Photograph: Christopher Thomond

Tax inspectors are attempting to bar MPs from claiming thousands of pounds a year to hire accountants to file their expenses, arguing that the current arrangements subsidise their personal finances rather than their work in parliament.

HM Revenue and Customs is embroiled in a dispute with the expenses watchdog, the Independent Parliamentary Standards Authority (Ipsa), which is defending the right of MPs to employ a professional to fill in expenses forms and tax returns for their offices and insisting that the cost – up to £5,000 a year for each MP – should be tax deductible.

An exchange of letters seen by the Guardian reveals tax officials have repeatedly told Ipsa that other employees are not allowed to claim back professional fees or the tax, and MPs should not be given special dispensation. Ipsa insists that, despite being on the parliamentary payroll, MPs are more akin to small businesses, which can reclaim such costs. The row has now reached a standoff, with neither authority willing to compromise.

The disclosure will prompt further scrutiny of the way that MPs' expenses are calculated and paid three years after the scandal that resulted in a shakeup in parliament.

John Mann, the Labour MP for Bassetlaw, who has campaigned for a stricter expenses regime, said the watchdog was out of tune with public opinion. "It is not the role of this supposedly independent body to challenge the role of the taxman. Everyone else has to abide by their rules, so why doesn't Ipsa?"

There was no justification for payments from the public purse for MPs' accountants, he said. "There is absolutely no requirement for an MP to employ an accountant unless they have too many jobs and complex outside incomes. In which case, they should pay for it themselves."

The row has emerged in a cache of emails between the two bodies disclosed under the Freedom of Information Act. They show that in July 2011, an HMRC official whose name has been redacted wrote to Ipsa seeking clarification over the right of MPs to claim money for accountancy fees.

An Ipsa official replied, confirming that MPs were allowed to claim the cost of accountants: "MPs can claim for bought-in services (out of their staffing budget) and professional services (out of their office costs expenditure budget) depending on the nature of their work."

This response did not satisfy the tax official, who challenged the decision and said it would effect the tax position of MPs. "We are concerned that these costs are personal rather than wholly, exclusively and necessarily incurred for the purposes of the member's parliamentary function. This will obviously have an impact on the tax position," the tax official wrote.

Days later, the Ipsa official replied, insisting that accountants were an allowable expense as long as the work being claimed for was for MPs' parliamentary expenses and not for any other parliamentary business. "This is not different than a member of staff submitting their expenses – it's a paid-for service and permissible under the scheme," the Ipsa official insisted.

The correspondence became increasingly tetchy. Days later, the tax official wrote back: "Ipsa appears to be making tax free reimbursements for these expenses … Even allowing for the unique position of MPs, it would be difficult to see how such an expense is necessarily incurred in the performance of their duties."

By September, senior officials became involved in the row. John Sills, the director of policy at Ipsa, wrote a letter to a senior tax official claiming that MPs have the right to claim money for legal advice or accountancy advice "where it is necessary for MPs to carry out their parliamentary functions similar to services required by small businesses. We understand that the relevant dispensations which have been granted therefore cover these services," he said.

An HMRC customer relationship manager replied: "Such expenses will not qualify for a deduction under section 336 ITEPA [Income Tax Earnings and Pensions Act 2003] as they are not incurred wholly, exclusively and necessarily in the performance of the duties of employment."

An Ipsa official confirmed that the dispute has not been resolved.

A spokesman for Revenue and Customs said: "We can't comment on individual cases but it's well understood that the costs of completing a personal tax return are not tax deductible. This applies across the board."

The documents also show that Ipsa has been using taxpayers' money to pay for the personal tax obligations of MPs on a number of items where tax officials have refused to offer a dispensation.

Ipsa pays tax on behalf of MPs for hospitality, food and drink consumed off the parliamentary estate before 7.30pm, taxi payments home after late sittings before 1am and insurance payments – all areas where tax officials have refused to grant dispensation to MPs. The watchdog is negotiating with Revenue officials over "reward and recognition payments" to be made to staff for good work.

The watchdog was established by parliament in 2009 after the controversy over House of Commons expenses but has faced criticism from MPs for failing to advise on or explain the new regime.

A spokesman for Ipsa said MPs cannot claim for their personal tax affairs and can only claim for business costs.

"An important principle of the scheme is that they can only claim for costs directly associated with their job of being an MP. Our view is that we will only reimburse money for costs that are wholly connected to being an MP. Where HMRC does not apply a dispensation, we pay the tax," he said.